UK Economy Faces Significant Slowdown Amid Iran Conflict, Treasury Warns
Treasury officials project growth could fall to 0.3% in 2027 if the Strait of Hormuz remains disrupted, with inflation also expected to rise.
The United Kingdom's economy is at risk of a severe slowdown, potentially reaching growth of just 0.3% in 2027 if the conflict in the Gulf continues to disrupt shipping through the Strait of Hormuz, according to internal Treasury assessments.
This projection, reported by Bloomberg, marks a significant downgrade from the Office for Budget Responsibility's forecast of 1.6% expansion. The anticipated slowdown would represent the UK's worst economic performance since 2023, a period marked by a cost-of-living crisis following Russia's invasion of Ukraine.
Treasury officials also warned that inflation could surge from 2.6% to 4.3% in the first quarter of 2027, further straining household finances. These forecasts emerge as Iran and the United States remain in diplomatic deadlock over a lasting resolution to the Gulf conflict.
The potential economic downturn poses a considerable challenge for Chancellor John Healey, with a budget expected in October that analysts predict may include substantial tax increases to fund government spending plans. A faltering economy would create a deficit in public finances due to reduced tax revenues and increased welfare payments.
Official figures are anticipated to show that economic growth slowed in the second quarter of the year, following a 0.6% expansion in the preceding three months. Concerns exist that the economy may have experienced no growth in June, raising fears of stagflation.
In addition to the geopolitical instability, the UK economy is also contending with the impact of extreme heatwaves. Economists estimate that the prolonged hot weather has cost the UK economy billions, with productivity declining, retail sales weakening, and drought affecting harvests and potentially leading to food shortages.
The price of oil has remained elevated, hovering near $90 a barrel, due to shipping disruptions in the Strait of Hormuz, a critical chokepoint for global energy supplies. The International Energy Agency has noted that global oil stockpiles are diminishing rapidly as a consequence of the ongoing conflict.